Validity Of Amendments To Contracted-out Rights – Important High Court Decision - Employee Benefits & Compensation

The High Court has held that amendments to certain post-April 1997 contracted-out rights that were not accompanied by the actuarial confirmation required under legislation are void. The Court's decision may have potentially significant implications for any occupational pension scheme that was contracted-out on a salary-related basis between April 1997 and April 2016.

Background

Schemes that were contracted-out on a salary-related basis between April 1997 and April 2016¹ were required to meet a statutory quality standard known as the "reference scheme test". The rights that scheme members built up for post-April 1997 contracted-out employment were known as "section 9(2B) rights". Under section 37 Pension Schemes Act 1993, if trustees wished to make an amendment affecting any section 9(2B) rights, they were required to obtain confirmation from the scheme actuary that, following the amendment, the scheme would continue to meet the reference scheme test. The confirmation was typically referred to as a "section 37 confirmation" or "section 37 certificate".

The Court's decision

The case concerned the validity of amendments to section 9(2B) rights for future service. The parties to the proceedings had been unable to locate a section 37 confirmation for the amending deed. The Court was asked to consider three issues²:

Was an amendment made to section 9(2B) rights in the absence of a section 37 confirmation void to any extent? The Court held that an amendment to section 9(2B) rights that was made without a section 37 confirmation was void. To the extent that the amendment related to other rights, it would be valid (assuming all other required formalities, e.g. under the power of amendment, were met).
If the answer to Issue 1 was yes, did the requirement to obtain a section 37 confirmation apply only to amendments to section 9(2B) rights in relation to past service (i.e. service prior to the date of the amendment) or did it also apply to amendments to section 9(2B) rights in relation to future service (i.e. service after the date of the amendment)? The Court held that the requirement to obtain a section 37 confirmation applied to amendments to section 9(2B) rights in respect of both past and future service.³
If the answer to Issue 1 was yes, did the requirement to obtain a section 37 confirmation only apply to adverse alterations to section 9(2B) rights or did it apply to all alterations?
The Court held that the requirement to obtain a section 37 confirmation applied to all amendments to section 9(2B) rights, whether or not they would or might have an adverse effect on those rights.

Implications for schemes

As it stands, the Court's decision means that, if there was no actuarial confirmation in the form required by section 37:

A change amending past or future section 9(2B) rights made on and after 6 April 1997 but before 6 April 2013 would not have amended the rights in question.
A court would potentially take the same view in relation to a change to future section 9(2B) rights made between 6 April 2013 and 5 April 2016.

It is possible that a court would take the view that the lack of a section 37 confirmation would invalidate a change closing a scheme to future accrual or ending contracted-out accrual. However, we think this is unlikely because such a change would involve the surrender of the contracting-out certificate and the ending of contracted-out employment, bringing the scheme outside the scope of the contracting-out legislation, including the scope of section 37.

At this point, we do not know whether the Court's decision will be appealed or whether there may be some form of government intervention. We would therefore advise trustees of schemes that may be affected by the decision to wait and see how the situation develops before taking any action. We will of course cover any developments in future newsletters. The exception to this is where the scheme is currently undertaking a transaction such as a buy-in or buy-out, a scheme merger or other bulk transfer or a benefit change project. In those cases, the trustees should speak to their legal advisers to understand the impact that the decision may have on the transaction.

If there is no appeal, the Court's decision presents an issue for schemes which cannot locate or otherwise evidence a section 37 confirmation for amendments made to section 9(2B) rights between 1997 and 2013, and amendments made to certain section 9(2B) rights between 2013 and 2016. The implications if an amendment is invalid will depend on the nature of the amendment and the scheme's particular circumstances. We would advise trustees to speak to their legal advisers in the first instance to understand the process that is likely to be involved in establishing whether any amendments are invalid and the potential implications for their scheme if any amendments are found to be invalid.

Footnotes

1 Contracting-out was abolished with effect from 6 April 2016.

2 The Court was asked to proceed on the basis that no section 37 confirmation had been issued. However, the judge emphasised that no determination had been made as to whether or not one was in fact issued.

3 It should be noted that the case only concerned amendments made between March 1999 and June 2010. In April 2013, the legislation was amended with the effect that a section 37 confirmation was only required for amendments to future service rights.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.